Credit Unions Preparing for Rising Rates: Onsite Coverage

LAS VEGAS – Credit union executives said Tuesday their institutions are making changes in preparation for a potential interest rate increase.

“We’re trying to stay shorter and shorter. Interest rates have nowhere to go but up so we’re holding everything pretty short so that when the rates do change, we can get into the longer term loans with better rates to match where they’re headed,” said Richard Smith, chairman of the board at the $376 million ProFed Credit Union in Fort Wayne, Ind., at NAFCU’s annual conference.

ProFed has also been selling off long term mortgage loans as another way to prepare for rising interest rates, he said.

“We’re selling those off and Freddie Mac is buying a lot of those. They are paying about 102% on those upfront so we’re staying short that way,” he said. “We’re still helping the members out when they come in wanting a mortgage, 15 or 30 years. We’re still doing the servicing so they feel like it’s still with us but at the same time we’ve gotten it off the books.”

CU Times asked Smith if his credit union decided to sell off long-term assets due to recommendations from its examiner.

“We started doing that on our own. The lead examiner on our exam said I have more pleasure coming to ProFed because your employees are happy, they’re not worried about tomorrow, they are professional, they don’t dread seeing us coming and he goes on to talk about the fact that we are staying short and he thinks we are preparing for the coming increase in the interest rates,” he said.

Smith was one of the many executives who attended a Tuesday conference session on interest rate risk with NAFCU EVP/COO Anthony Demangone.

“Assets tend to lose value when interest rates go up,” he said while explaining the NCUA is worried about interest rate risk.

However, Demangone told credit unions the NCUA’s focus on interest rate risk in the risk-based capital proposal is not the best strategy.

“We believe that’s not necessary a good idea,” he said. “You will never eliminate risk, you have to manage risk.”

Demangone said NAFCU has heard NCUA is going to put forth a new rule in the future to address interest rate risk.

Other executives attending the conference said they have adjusted their balance sheets in preparation for a rise in rates.

“We have quite a bit of liquidity. We’d like to invest it and also have more loans but there is concern about delinquencies on loans so we’ve had to tighten up our criteria on loans,” said Thomas McCaskey, chairman of the board at the $158 million Auburn University Federal Credit Union in Auburn, Ala.

“We’re invested heavily in government backed securities so we’re kind of in a dilemma right now, trying to loan out more money rather than invest it, because we’re not earning a whole lot on our investments. So when interest rates do rise, [we will] have money that we can invest at a higher rate,” he said.

Another credit union offical, who asked not to be named, said his credit union reviews interest rate risk management practices monthly.

“So that’s how we don’t get caught in a surprise. It doesn’t mean there won’t be a surprise, but it won’t be a big one,” he said.